One man's journey to financial independence.

My Business Plan – All About Interest

This is my “All About Interest” business plan. This is a dividend growth plan that will focus on investing in sound companies that meet certain criteria listed below. These are companies that typically have a long track record of paying and increasing their dividend each year at rates higher than inflation.

While this plan is long overdue in writing, I’ve had it formulated in my head for some time. Maybe my plan will help some others create their plan for financial independence (FI).

Main Goal: Produce a consistent income stream from dividends that will grow each year at a rate higher than inflation. The companies producing these dividends should be hand-picked and meet all of the criteria in my plan.

Stock Selection: 1.) At least 90% of all stocks chosen should be in the CCC lists, that is the Champions, Contenders and Challengers list maintained by David Fish. This list can be found on my Get Started tab.

2.) Small-Cap or larger ( >250 million market cap).

3.) 10-year YOC should be 10% or higher (typically using 5-year CAGR).see a monthly CCC Ranking to find out how i calculate this metric here.

4.) Minimum yield of 2.5% (exception can be made as long as target total portfolio yield holds).

Portfolio Composition:1.) Target of 40 total companies in final portfolio.2.) Target weight of 2.5%, no company should be above 10% weight unless a very compelling reason exists.
If the total number of companies do not equal 40, then the target weight percentage will be calculated by dividing 100 by the current number of companies (i.e., 20 companies will give 5%). The max allowed weight will be four times this number.

3.) Total portfolio yield > 3.5%. That means to produce $60k in yearly income, I’d need a portfolio size of $1,714,285.71.Dividend Reinvestment: All dividends should collect and not be automatically reinvested. Instead they will be added with fresh capital and deployed into my best ideas at the time. This prevents investing in a company when I think it’s overvalued.

When to Sell or Strongly Consider Selling:

1.) Dividend is eliminated, cut or held constant2.) A major reorganization happens3.) The company has serious changes to fundamentals4.) The company becomes extremely overvalued5.) The company has a total return less than 5%/year over last 5 years6.) The company increased its dividend at a rate below inflation7.) The company plans to be acquired or mergesPortfolio Diversification: 1.) Target Sector Weights:Energy & MLP’s – 15%
Healthcare – 15%
Consumer Staples – 15%
Financial & REIT’s – 12%
Industrials – 10%
Telecom Services – 8%
Utilities – 8%
Materials – 8%
Information Technology – 6%
Consumer Discretionary – 3%

Looking Ahead:I think this lays out a good start to my business plan. There are parts of my plan that are subjective and I’ve left room to improve upon or modify this plan as I get closer to FI. I have tried to set some good guidelines to use for myself in building up my “All About Interest” plan. I also realize I have a couple of companies that don’t meet all of these guidelines. As I approach FI, I plan to reduce exposure to any speculative positions.

Comments

This plan looks great. Quick question though, would you follow your diversification process as you are building up a portfolio or wait until after you have several positions established? It seems like you could be tough at times to purchase stocks in a specific sector if that particular sector is full over over-valued possibilities.

Thanks! I think it’s a good general set of rules to start with. For me, my target is 40 companies and I currently have 39 so I’m going to be watching my diversification. However, if I was just starting to build my portfolio I’d probably be buying the best values I could find in the market at the time and worry about diversification later. So I wouldn’t worry about being overweight in a particular sector while you are in the first half of your building phase.

Good plan! I’m wondering, though, about your motivation for wanting to sell or strongly consider selling companies that become extremely overvalued. I can understand why you wouldn’t want to add such positions, but why sell out of them? Your yield on cost wouldn’t be changing unless the dividend changes…

Thanks. That’s why I put “strongly consider” so I’m not necessarily obligated to sell. Also extremely overvalued is also vague. Basically If a company had run up in price so much that its portfolio weight was out of whack and I also believed the stock was extremely overvalued then I might trim shares. I would only trim shares however, if I had a suitable replacement in a stock that wasn’t as overvalued at the time.

Hey! I really like the plan you laid out, I might have to do one of these too. Sometimes I seem to stray off the path a bit, a business plan makes sense.

One suggestion, and I am probably nitpicking here:

1.) At least 90% of all stocks chosen should be in the CCC lists, that is the Champions, Contenders and Challengers list maintained by David Fish. This list can be found on my Resources tab.5.) Increased dividend payout every year for at least the last 5 years.

These are saying the same thing since a company needs a 5 year streak to be on the CCC list. Perhaps #5 isn’t needed? Anyways I enjoyed this post!

I’m glad you liked the article. I was actually thinking about those statements after I wrote them and you are correct. I will have to remove or edit that because it is redundant. Thanks for pointing that out.

Great approach. I also struggled to put my plan on paper and it is also way overdue. So it is great to see yours as inspiration when I finally kick myself into writing mine. I like that you maintain some flexibility in rules (although it may not be the best approach sometimes, but I think, as small investors we can afford more flexibility than mutual funds for example.

Although I’ve run similar numbers on the required portfolio size, it is always astounding to see it again. Granted, I do not have the income or expenditures that you do, my number is still large relative to my income. Persistence!

The final number does sound huge and so far away. That’s why I make shorter term goals and look forward to the monthly increases in forward income I’m getting. I know I’ll get there at some point and good luck on your journey as well. I’ll be watching your updates. You are right, persistence is key.

I am not an expert in buying stocks and frankly trying my level best to understand how things work for a positive return. Your business plan is just a perfect one for me to find more interest on stock market investment. Looking forward to explore more useful content of your website.
Thanks for this share.Santanu recently posted…What Is Your Reason To Retire Early from 9 To 5 Job

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I am not a licensed financial professional. I created this site to be informative and entertaining. No purchases I make are recommendations to buy those particular equities. I'm not liable by any party for losses you might incur. All investments are subject to losing money and you should consult a financial professional before making any investment decisions.